Suster: You Can't Be Totally Transparent

Mark Suster is a two-time entrepreneur who has gone to "the dark side" of venture capital. He joined GRP Partners in 2007 as a general partner after selling his company to Salesforce.com. He focuses on early-stage technology companies. You can find him on Twitter @msuster.

Columnist, Inc.

1 COMMENTS

IMAGE:

Advertisement

CEO transparency. It almost sounds uncontroversial. A CEO should tell her staff everything, right?

Of course not.

It's a hard topic to write about because it's almost an accepted norm that total transparency is good. But it is not. For starters, let me use "CEO" as a proxy to include her "inner circle," which might mean co-founders or senior execs at the business. I do believe in total transparency with your core.

The Mind of the Founder

You took the risk to start your company. You quit your day job and look the leap off of the cliff. It's so much scarier than most people admit, even to themselves.

All of a sudden you know you're going to be judged.

Your parents want to know why on Earth you'd leave a job at Google. "Honey? Aren't they worth billions of dollars?" "Yeah, Ma. But I'm working on a large team of people trying to figure out how to make micro improvements to a paid-search algorithm. Fun stuff, I know, but it's time for me to try something more stimulating." "Oh, OK, Honey. But aren't you getting married next year? How are you going to pay for the wedding?"

Your peer group is envious of you finally doing what they've always wanted to do, but find it too hard to give up the golden paycheck and predictable future. They can't wait to hear your brilliant idea. "What? You left our team to work on that? A tool to better help you find bars and restaurants? Aren't there like 10,000 of those?" "True. But mine is different. I've finally cracked it."

Your VC friends have been egging you on. They told you, "Yeah, man, I'll gladly write the first $250,000. Call me when you're ready to leave." Now they have a deep sigh when they hear what you're actually working on. "Dude, we saw a bunch of those last year. We funded one in 2005 and lost a lot of money."

It's scary because that hard-earned $40,000 you have slavishly saved "for the future" is going to dwindle fast if you can't bring in funding.

But so far this is the easy bit.

Now you've got to convince your peer group to quit their respectable jobs and career arcs and join you. You've got to convince your buddies to part with their hard-earned savings and back you as angels.

And you pull the basic team together with some tech team members working evenings and weekends to conserve cash. You scraped together enough for an angel round, but not enough to pay yourself a real salary. You have a runway that would make San Diego Airport's look long. Nine months seems like a lifetime, but given how long it will take to ship your V1 product (five months) and how long it will take to raise your next round (three to four months), there isn't a lot of room for error.

How can you show "traction" on a product that just launched?

As a start-up CEO, you constantly have to suspend disbelief. Or, as I often tell first-timers, you simply have to have a blind belief that you'll find a way to make it all work out. You simply can't afford to be overly cautious or you'll never achieve anything.

A cautious person wouldn't try to pry people out of Twitter right before their IPO to "join my cause!" A cautious person wouldn't stand on stage and tell a large audience she is going to change the world while secretly wondering when her team is going to work out the bugs in the product so she can actually launch. "We are tackling $1 trillion global market. It's inefficient. And we have the breakthrough technology to change things. We just need your $500,000!"

A start-up CEO's job is to absorb stress so the team doesn't have to. Her job is to turn up every day with enthusiasm, even though her boyfriend just broke up, she hasn't spoken to her best friends in weeks, and she's beginning to wonder whether this idea is so great after all.

Start-ups have to be optimistic because no rational person would actually believe you could build Uber into the amazing company that it is today. A rational person would have assumed that the taxi organizations and regulation would have made it impossible.

Yet the best and the strongest founders are able to overcome the stresses, the self-doubt, the sacrifices, and the risks, and press on with optimism. Perhaps it's "naive optimism," but in reality that's probably the best kind.

The mind of a founder is wired differently than most people. She has a better ability to embrace ambiguity and accept risk. She doesn't fear personal failure or shame as deeply as the next person.

Or as Sir Winston Churchill said, "Success is the ability to go from one failure to another with no loss of enthusiasm."

You need to accept that you are wired differently to know that most people don't want your full level of data and knowledge.

It's kind of like a security analyst. We probably don't want to know everything they actually know, just that they're working hard to keep us safe.

How open should you be with your staff?

Well, you need to be open. I believe in transparency as much as the next guy. But total transparency is what most people think they want, not what they really want.

I'd like to give you a few examples that are more nuanced:

1. Mergers and acquisitions

In the start-up journey, if you have success in your early product launches, fundraising, and PR, you're likely to get "inbound interest" from likely acquirers. It's hard to parse out the real level of interest from people just sniffing around or gathering facts. You try to take calls to be polite and let's be honest--for many of us, the flattery is nice and who knows, maybe this could be a real financial bonanza. But in the back of your mind, you're a realist. You know this isn't likely to lead anywhere, and frankly you didn't quit your job to pursue your life's dream only to sell 12 months later in an acqui-hire.

You take the meeting, but you're not really pursuing it. But staff can't make the delineation in their heads. They see the dollar signs and the victory. They don't understand VC liquidation preferences or multiple return expectations. They weren't with you when you did the VC pitch, when you looked them in the eyes nine months ago and said, "I see only one outcome: We want to build something really big. This project has been my life's dream."

I worked with a start-up CEO who decided he wanted to sell his company. I wasn't in favor, but when the CEO decides it's the right thing to do, you support him. He went on the road and talked to many acquirers. He told his entire team what was happening. There was excitement around the office. The company had been hot, so he had assumed that selling for "just $75 million" would be achievable. But it wasn't. Good press and industry mojo weren't enough to overcome the financial metrics of the business and the offers came in around $10 million.

I wasn't surprised. We decided not to sell. The start-up CEO was not the original founder. He told me that he wanted to transition out of the business if we weren't going to sell it. I know, that sounds terrible. Like most start-up situations--it's complicated. But we parted on good terms.

Here's the thing. His entire team knew about the process and that we didn't sell. Eventually, the tech team departed en masse to find the next great stock option scheme.

Had they stayed, I believe we could have done it together. The business concept was strong, we just needed to tweak it to adjust for market changes and we needed patience and resilience.

I'll put it more bluntly: You simply can't tell most of your staff when you have M&A approaches.

It is a big distraction while you're going through the process. It is a big distraction when buyers play the usual mind games like, "Well, if we don't buy you, we'll buy your competitor and compete with you." Yes, that happens all the time. It is a big distraction when they seemed all hot-and-heavy at your first meeting, but didn't even bother to call you back. And it's a big distraction when you do finally say "yes" to getting acquired and you deal with the endless minutiae of details involving disclosures, indemnities, and taxation problems.

2. Runway of cash"¨

An employee walks up to me and says, "Mark, I'm thinking about buying a house. Would now be a good time to buy a house? I'd need a letter from you to help with my loan."

"Buy a house? Are you kidding me? We have five months worth of cash in the bank! It's 2003 and VCs aren't exactly lining up to fund startup businesses. Sure, our revenue is growing, but is that enough to raise an internal round? Yes, I know our VCs said they would lead an inside round if we didn't find the money externally, but you do know that they're going to let us run right up to the cliff and fund us when we have three weeks worth of cash left in the bank, right? Of course you shouldn't buy a house. Do you see me buying a house?" (I didn't actually say that. That just went through my brain.)

What I said was, "Well, you do know we work at a start-up and that has more risk than working at Barclays Bank? Our VCs are pretty supportive of us, so I feel good about the future, but of course you know I could never say for sure that they'll fund us going forward. I personally prefer not to own a home in these circumstances, but if you really want to buy a home, I'll happily help you by writing a letter."

I think that is transparency. It's just not total transparency. It's not ruthless transparency. (And yes, he did buy a house.)

I've had this debate privately enough to know that most junior people at companies think that this mindset is a cop-out. But I've also had enough direct experience to know that what people want to know is, "If it is going to be OK or are we facing tough times?" Nobody really wants the details--they want the end product. And trust me when I tell you that 90 percent-plus of the people can't wake up every day with the uncertainties and insecurities that start-up founders face.

Most employees want cruising altitude. Most founders live in take-off mode.

3. Dilution/valuation"¨

I hate when companies publish too much information about the total stock option allocations, the company valuations, the dilution faced in every round, etc.

It is not out of a desire to hide things or be deceptive. It is because when you share too much of this information with staff, you develop an "options culture" that I find unhealthy. If you find employees building spreadsheets and spending time on exit scenarios and what their take would be, then you know your company has "optionitis."

Of course, as a founder and CEO, you know that your 18 percent of the company at an $80 million is worth more than 26 percent of a $30 million valuation, but I promise you that this is a nuance that even really smart and educated employees struggle with.

"But I was promised 0.75 percent of the company and now I only have 0.49 percent--I feel like I got screwed. I wasn't expecting this much dilution this quickly."

This is a real conversation I have all the time, even now.

I always encourage transparency about compensation, just in a different way.

Other than when we first started and were both dumb and naive ("Well, when we IPO for $3 billion your stock would be worth ...") I steered away from an option culture. My regular speech (which many of you have heard) is:

"Join our company because we're doing exciting things.

Join because you're going to get more responsibility at a young age than you would a bigger company. Join because we're a meritocracy and promote success, not tenure.

Join because every year at the end of the year, you can say that your resume is significantly better than it was the year before. Join because as we continue our successes, we will have more resources to reward you with, and reward we will.

But don't join if you're looking for a get-rick-quick scheme. We're not that company. We pay less than you could earn at other companies. We have to.

All I ask is to earn your employment every year. If at the end of each year you haven't grown in skills and stature; if at the end of the year you don't feel like you're still enjoying the journey; if at the end of the year you don't think your resume is going to look better at the end of next year, then it is time to leave. I'm going to work hard to make sure you never have to. And if money comes through options at the end of our journey that's icing on the cake."

Those are two different types of transparency.

Summary"¨

There are transparency issues around firing or redundancies. There are issues around performance of key staff members. There are times when you need to "hire above" somebody not rising to the expectations you have of their role. There are merger discussions, board debates, product miscues, revenue misses, and a litany of delicate topics.

I do believe in being open and direct. I believe in giving people a general sense of the business performance and the challenges the company is facing. I believe in company metrics that are publicized and can be used for motivation and creating a unified sense of purpose.

As a start-up CEO, you'll have to develop your own comfort level with what to share and whom to share it with. But please remember that we're all wired different to accept uncertainty, risk, and stress. And remember, the reason that most people aren't start-up CEOs is that deep down while they might want your job, theoretically most of them don't actually want the kind of life and pressures that come with it.